Evolve and Synapse in $13M Funds Dispute Amid Growing BaaS Crisis

The crisis in the banking-as-a-service (BaaS) sector is escalating as Synapse and Evolve Bank & Trust dispute over who is responsible for a $13 million deficit in FBO accounts. Evolve has seized a $16 million payment, which includes customer interest payments, from Synapse and demanded the firm to set aside $50 million in a reserve account.

Relationship Deterioration and Contract Termination

Evolve Bank & Trust recently informed BaaS platform Synapse of an alleged breach of contract and its intention to terminate their relationship. This follows a period of disagreement over responsibility for the $13 million deficit in FBO accounts holding customer funds at Evolve, as well as other issues. The two companies have experienced consistent difficulties in reconciling their accounts and transactions, a problem each party blames the other for.

Irregularities in Transaction Reconciliation

Synapse CEO, Sankaet Pathak, sent a letter to Evolve’s top executives, alleging an error on Evolve’s part. The error, according to Pathak, led to third-party payment processor TabaPay incorrectly debiting an FBO account for an amount exceeding $12 million. The letter also alleges that inappropriate debits from customer funds held in Evolve’s FBO accounts have been occurring since 2020, and possibly earlier, indicating a fundamental inability of Synapse and Evolve to properly monitor and reconcile accounts and transactions.

Reconciliation issues also existed with remote deposit capture (RDC) and checks. Problems included voided checks that were settled incorrectly, checks marked settled but were subsequently returned, and checks that Synapse did not receive settlement for but should have. Major fintech companies such as Mercury, Rho, Yotta, YieldStreet, Copper, Relay, and Stilt have reportedly been impacted by these issues.

Mercury Parts Ways with Synapse

Mercury, Synapse’s largest client, has chosen not to renew its agreement with Synapse, opting to work directly with Evolve instead. It is understood that Mercury accounted for 60-70% of all deposits sourced through Synapse. This move coincided with Evolve’s intention to terminate its relationship with Synapse.

Seized Payments and Reserve Account Demand

Alongside terminating the relationship, Evolve seized over $16 million from Synapse, citing a deficiency in the FBO Account balance and the need to protect the interests of end users. Additionally, Evolve demanded that Synapse set aside $50 million in a reserve account. The letter from Synapse CEO Pathak also alleges that Evolve has been underpaying Synapse, claiming a shortfall of nearly $3.3 million in March 2023.

As the BaaS crisis continues to unfold, the issue between Synapse and Evolve underscores the sector’s urgent need for improved oversight and reconciliation systems.